Today's Fun Fact
Pepsi got its name from the digestive enzyme pepsin.
Here's what you need to know before the US markets open.
Market Snapshot 📈
What to expect in today's market 🕒
Broadcom Inc. Earnings (AVGO)
Lululemon Athletica Inc. Earnings (LULU)
Campbell Soup Co. Earnings (CPB)
PagerDuty Inc. Earnings (PD)
Signet Jewelers Ltd. Earnings (SIG)
Weibo Corp. Earnings (WB)
6:00 PM IST: Initial Jobless Claims
7:15 PM IST: S&P US Manufacturing PMI
Through The Day: Light Motor Vehicle Sales
🔕 Dell: A Warning Bell?
Dell Technologies Inc. (DELL) expects an “increasingly challenging operating environment” in the second half of 2022. At the same time last year, the company delivered a record-breaking quarter and sounded optimistic for the future. What has gone wrong in 12 months?
A Premonition?
Dell disrupted the Personal Computers industry in 1984 with its launch. Over the years, it has expanded its portfolio to selling servers, laptops, data storage devices, and even MP3 players. Despite the wide range of products, ~60% of the company’s revenue still comes from PC sales.
The company shipped a record number of PC shipments in Q2 last year, adding that demand is “way ahead” of supply. Even during a record-breaking quarter, Dell and its peer Hewlett-Packard warned about the shortage of critical components. Despite such a shortage, Dell’s Client Solutions Group (CSG), which sells hardware devices, grew 30%.
PC demand is falling at its fastest pace in nearly a decade following a two-year pandemic-led boom. According to Gartner, shipments dropped 12.6% between April-June, marking the sharpest fall in nine years. Computer-makers dispatched 72M PCs during the quarter, compared to 82.4M during the same period last year. International Data Corp., that analyzes data through a different formula, pegged the decline at 15.3%.
The PC market in the US has declined 17.5% in Q2, largely due to Chromebook shipments halving and inflation-squeezed budgets which delayed purchases.
Investors exited tech stocks towards the end of 2021 and the start of 2022 and switched towards profitable, dividend-paying companies trading at a cheaper valuation. Dell fit the bill, but now that bet appears to be losing steam. Analysts also turn wary in such a scenario as companies like Dell offer more consumer Behavior insights due to their large D2C business.
On Expected Lines
Dell joined its rivals in predicting a slowdown as businesses tighten their purse string. Quarterly performance was subdued as revenue barely managed to meet expectations while Earnings Per Share scraped past estimates. The results were also followed by guidance that left investors displeased.
Key Highlights From Q2:
Revenue: $26.4B Vs $26.4B expected
Earnings Per Share: $1.68 Vs $1.64 expected
Co-COO Chuck Whitten mentioned during the earnings call that customers are reducing the size of their orders, and are buying only for immediate requirements. There is also caution around future hiring and trade offs within their IT budgets.
Dell’s 9% revenue growth during the quarter is its slowest in nearly 18 months as a stronger US Dollar hurt topline growth, as did the Covid-19 flare-ups in China, which is the company’s second-largest market.
The management warned of greater challenges as they see “more cautious consumer behavior,” on similar lines as CRM-leader salesforce. They also said that the company is operating in “an increasingly challenging environment.”
Among various business segments, Infrastructure Solutions Group, which includes most of Dell’s technology services, grew 12% while the server and networking sales business increased 16%. Storage revenue also witnessed a 6% growth. Gross margins declined to 21.4% due to higher expenses and currency fluctuations, which are not factored into product prices.
Future Performance Obligations, or the total future performance obligations arising from contractual relationships, stood at $41B, a 2% year-on-year growth.
Improvement in supply-chain backlogs and backlog-clearing PC sales helped Dell offset some demand weakness. However, the backlog for the infrastructure unit remained elevated, particularly for server components. The company also expects a hit from company cost inflation in the current quarter.
Dell expects current quarter sales to drop 8% from last year and can range between $23.8B to $25B. The guidance missed street expectations of $26.4B. For the full fiscal, it expects revenue growth to be flat to a 2% growth. However, the company’s long-term financial model projects annual revenue growth of 3-4% and EPS growth of 6%, neither of which managed to calm investor fears. The stock had its biggest single-day fall since returning to the public markets in 2018.
The addition of more business clients also managed to offset the slowing demand for PCs. The sale of consumer PCs declined 9% while commercial sales increased 15% year-on-year. For the current quarter, PC sales are expected to decline in the high-teens.
Dell expects the Infrastructure unit revenue to grow in the low-teens and the management sees a more challenging demand environment here. That commentary surprised analysts who were expecting better considering the results shown by the company’s peers. They also added that Dell’s elongated purchase decisions and smaller orders can be a test case for broader weakness.
At 6x forward earnings, Dell is the cheapest stock in the Nasdaq 100. Yet, investors are wary of logging in amidst an uncertain demand environment and a not-so-promising outlook. Analysts believe that a discounted price is no longer enough to make hardware stocks attractive. Dell’s machine is slowing down and it will require a lot of clearing (pun intended) to get the growth engine moving again!
Market Reaction
DELL ended at $38.29, down 3.53%.
Newsworthy 📰
Big Blow: NVIDIA stock falls after US Government restricts chip sales to China (NVDA -6.56% Premarket)
Start: Walmart-owned Sam's Club raises annual membership fee for the first time in nine years (WMT -0.07% Premarket)
Difficult Steps: Bed Bath & Beyond announces store closures, layoffs and new financing to fix struggling business (BBBY -21.30%)
What Next?
Subscribe to the Trove YouTube Channel
Join the Trove Telegram Community
Rate us on the Playstore or Appstore
Disclaimer: The email content is prepared and provided by Winvesta India Technologies Ltd. for informational and educational purposes only and is not meant to represent trade or investment recommendations. Remember capital is at risk. Terms & Conditions apply.